Market Wizards Study Notes by Zhipeng Yan

Market Wizards Study Notes by Zhipeng Yan

Market Wizards

Interviews with Top Traders

Jack D. Schwager

Part I FUTURES AND CURRENCIES.......................................................................2

Michael Marcus: Blighting Never Strikes Twice...........................................................2

Bruce Kovner: the World Trader....................................................................................4

Richard Dennis: A Legend Retires.................................................................................6

Paul Tudor Jones: The Art of Aggressive Trading.........................................................7

Gary Bielfeldt: Yes, They do Trade T-Bonds in Peoria.................................................9

Ed Seykota: Everybody Gets What They Want..............................................................9

Larry Hite: Respecting Risk..........................................................................................11

Part II MOSTLY STOCKS..........................................................................................12

Michael Steinhardt: The Concept of Variant Perception..............................................12

William O’Neil: The Art of Stock Selection................................................................12

David Ryan: Stock Investment as a Treasure Hunt......................................................15

Marty Schwartz: Champion Trader..............................................................................16

Part III A LITTLE BIT OF EVERYTHING.................................................................17

James R. Rogers, Jr.: Buying Value and Selling Hysteria............................................17

Mark Weinstein: High-Percentage Trader....................................................................18

Part IV THE VIEW FROM THE FLOOR....................................................................20

Brian Gelber: Broker Turned Trader............................................................................20

Tom Baldwin: The Fearless Pit Trader.........................................................................20

Tony Saliba: “One-lot” Triumphs.................................................................................21

Part V THE PSYCHOLOGY OF TRADING..............................................................21

Dr. Van K. Tharp: The Psychology of Trading............................................................21

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Market Wizards Study Notes by Zhipeng Yan

Part I FUTURES AND CURRENCIES

Michael Marcus: Blighting Never Strikes Twice

1. Start as a commodity research analyst, then a floor trader, then work for Commodities Corporation. He attributes his success to Ed Seykota, who taught him how to cut losses, as well as the importance of riding winners. Ed is a trend follower, who utilized classic trading principles. Ed said, “The trend is down, and I’m going to stay short until the trend changes.” He learned patience from him in the way he followed the trend.

2. Plywood price case: it was theoretically frozen at $110 per 1000 square feet. One day, the futures price was trading 20 cents over the legal ceiling. So I started calling around to see what was going to happen, but nobody seemed to know. I used the following reasoning: if they let it trade over $110 today, they might let it trade anywhere. So I bought one contract. Ultimately, plywood went to $200. The futures market functioned as a supply of last resort to users who couldn’t get supplies elsewhere. Basically, it created a two-tiered market, a sort of legal black market.

3. Things leaned from the floor: you develop an almost subconscious sense of the market on the floor. You learn to gauge price movement by the intensity of the voices in the ring. I learned the importance of intraday chart points, such as earlier daily highs. At key intraday chart points, I could take much larger positions than I could afford to hold, and if it doesn’t work immediately, I would get out quickly. My trading in those days was a bit like being a surfer. I later used that surfing technique as a desk trader. Although that approach worked real well then, I don’t think it would work as well in today’s markets.

4. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamental suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances. All my profits come from the trades that met the criteria. The other trades broke even and kept me amused. The thing that saved me was that when a trade met all my criteria, I would enter five to six times the position size I was doing on the other trades.

5. I believe that the era of trend following is over until and unless there is a particular imbalance in a market that overrides everything else. Another exception would be if we were to enter a major inflationary or deflationary environment. One reason we don’t have many good trends anymore is that the central banks are preventing currency moves from getting out of hand by taking the other side the trend.

6. I try to avoid the currencies, because I feel it is a totally political situation; you have to determine what the central banks are going to do. During late 1978, the dollar was getting battered, falling to new lows every day. One day, we noticed

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